Some believe recent declines in world dairy prices represent a market correction, rather than a shift into a bear-market cycle.
The world dairy markets have turned in the last 8-10 weeks, with Oceania milk powder and butter prices down around 15% and European prices down 5-10% compared with their mid-February peak. Oceania whole milk powder prices are the lowest in more than a year.
Supply shortages have eased – a combination of very strong production out of Oceania and Europe, and a break in China’s ravenous appetite. Since last August, milk production in the EU-28 and New Zealand is up almost 5% from the prior year – an additional 620,000 tons of milk per month. Record milk prices have created a strong incentive to push volume, and weather has been favorable for cows. In Europe, the final year of milk quota is underway.
In the first quarter of the year, China imported 564,000 tons of milk powder, cheese, butterfat and whey, up 58% from the prior year. This massive volume of imports absorbed the growing world supply. But they’ve pushed themselves away from the table in April.
In China and elsewhere, buyers have short-term needs covered. With prices falling, many are willing and able to wait until the market stabilizes before extending coverage.
We believe recent declines represent a market correction, rather than a shift into a bear-market cycle. We look for prices to find support in the next month or two. After a year of purchasing hand-to-mouth, buyers’ pipeline holdings are still relatively low and they can’t hold out for long.Oceania is heading into its off season, leaving a hole in world supply. U.S. production, too, is sluggish.
Other Key Factors
• Among the five major suppliers, milk production in the December-February period was up about 3.2%.
• New Zealand milk production for the current season is on track to finish about 9% ahead of a year ago, despite dryness on the north island. March output was up about 21% vs. last year, when widespread drought led to an early end to the season. Australia production is now slightly ahead of the depressed levels of a year ago, but will likely finish the year down about 1%.
• In December-February, EU-28 exports of milk powder, cheese, butterfat and whey were up 18% from the prior year, with a 41% jump in milk powder sales. In January, EU production of SMP was up 10% and WMP was up 11% vs. the year before. In January, EU SMP exports topped 50,000 tons for the first time since May 2012.
• China probably accounted for close to 25% of world dairy trade in the first quarter. Purchases of milk powder, whey products, butterfat and cheese were 564,000 tons.
• A new Algerian milk powder tender – for about 45,000 tons — is reported to be in the works, with delivery prior to Ramadan (June 28). This should provide market support.
• Flooding in Argentina has knocked milk deliveries below the already-depressed levels of a year ago, limiting exportable supplies. Uruguay, too, is suffering from flooding.
• Russia has banned cheese from six of Ukraine’s leading exporters, causing inventories to build and manufacturers to direct milk supplies to butter and powder. About 85% of Ukraine’s cheese exports last year – 4,100 tons per month– went to Russia.
• Russia imports of butterfat were up 25% in the November-February period. Russian milk production was down 4% last year and is tracking 1-2% lower in early 2014.
• There is more talk, especially out of Australia, of an El Niño weather pattern developing in the Pacific Ocean. More consistent reports of a potential El Niño could support markets if buyers anticipate global supplies will be impacted.
• In the first two months of the year, Japan imports of milk powder, cheese, butterfat and whey were down 8% from the year before. Mexico imports in January were off 11%.
• Prices have plunged at the last five Global Dairy Trade auctions. The average winning price at the April 15 event ($4047/ton) was down 20% since early February. The WMP price has lost more than $1000/ton. Volume available on GDT has increased as Fonterra attempts to clear production before the end of the season.
Source: Ag Web